New York Markets After Hours

Apple sued by Einhorn over stock proposal

Activist says firm should not eliminate ‘blank check’ preferred stock

By

DanGallagher

SAN FRANCISCO (MarketWatch) — Apple Inc. saw a fresh challenge emerge on Thursday, in the form of investor activist David Einhorn opposing the company’s plan to eliminate the use of so-called “blank-check” preferred stock.

Getty Images

Apple CEO Tim Cook, left, and David Einhorn of Greenlight Capital.

The new campaign by the hedge-fund heavyweight comes as Apple’s
AAPL, -1.54%
market value has tumbled by 35% since early fall — but its operations have continued to generate mountains of cash. The company ended its most recent quarter with more than $137 billion in cash, short-and-long term investments on its balance sheet.

That is likely to fuel more efforts to persuade the company to return more cash to shareholders — even after Apple broke down and finally started paying a dividend last year, with some modest share buybacks.

“The reality is, they have an obnoxious amount of cash, and that’s been the case for the last four years,” Gene Munster of Piper Jaffary told MarketWatch.

Einhorn himself has been pushing for Apple to consider using preferred stock to return cash to shareholders. He floated the idea publicly at an investment conference in May of last year, and says he discussed it with Apple directly before the company “rejected it outright” in September.

Apple has since put a proposal on its proxy statement to eliminate the option to grant these sorts of preferred stock without shareholder approval. So Einhorn’s Greenlight Capital filed papers with the Securities and Exchange Commission on Thursday, urging Apple shareholders to oppose the proposal that will be up for vote at its annual meeting on Feb. 27.

Einhorn also filed suit against Apple in the U.S. Federal District Court for the Southern District of New York. The firm says that case is targeted on the fact that Apple has bundled the “blank-check” item with others into a single proposal on its proxy statement. The proposals, Einhorn said, “need to be unbundled and voted on separately as required by Securities and Exchange Commission rules.”

Apple responded with a statement later in the afternoon, saying its management team and board have been in “active discussions” about returning additional cash to shareholders. “As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock,” the statement read.

Apple shares got a late boost following the statement, with the shares up nearly 3% to $468 minutes before the close.

In the company’s proxy statement filed last month, it proposed to change its existing bylaws that currently allow it to issue shares of preferred stock that have voting, conversion and other rights without the approval of shareholders. It noted that it has not issued preferred shares since 1997.

“The Board does not intend to issue preferred stock in the future and believes that it is appropriate to eliminate this provision from the Articles,” the proxy read. “If the proposed amendment of the Articles is approved by the Company’s shareholders, any future issuances of preferred stock would require shareholder approval.”

In his filing on Thursday, Einhorn said Apple’s move “unnecessarily limits the Board’s flexibility to distribute preferred stock as a means of unlocking shareholder value.”

“A shareholder since 2010, Greenlight believes Apple is a phenomenal company filled with talented people creating iconic products that consumers around the world love,” Einhorn wrote. “However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy.”

Apple vs. Einhorn: An Analyst's Take

(3:15)

Investor David Einhorn has come out against an Apple proposal to eliminate preferred stock. What's the analyst take on it? Global Equities Research analyst Trip Chowdhry joins digits.

In its statement on Thursday, Apple said it was sticking by it’s original plan. “If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders,” the statement read.

Munster on Thursday said he believes Apple’s intention with the proposal is to end the calls from Einhorn and likely other shareholders. “They’ve probably been getting tons of calls about this for the past two years,” he said, adding that most of Apple’s shareholders will likely support the company’s plans.

But Apple’s stock has taken a hard hit over the past few months, having peaked around $700 at the launch of the iPhone 5 in late September. Investors have become concerned about the sustainability of the company’s margins and its flagship iPhone business in the face of growing competition. The stock has crumbled by about 35% since hitting its peak.

“The recent, severe under-performance of Apple’s shares, which are down approximately 35% from their peak valuation, underscores the need for the company to apply the same level of creativity used to develop revolutionary technology for its consumers to unlock the value of its strong balance sheet for its shareholders,” Einhorn wrote.

The California Public Employee Retirement System, or CALPERS, said in a Feb. 4 filing that it is supporting Apple in eliminating “blank check” preferred stock. The fund owns about 2.7 million of the company’s shares.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.